Who the REAL Taxpayers Are & Why Income Inequality Isn’t Nearly As Bad As Critics Claim

13 Feb

I’m sick & tired of politicians, pundits, and “average joe’s” invoking the term “Taxpayer” in their mostly uninformed rhetoric.  You know what I’m talking about: “The Taxpayers are angry about bank bailouts,” or better, things like “The Banksters are getting rich at the expense of The Taxpayers.”  First of all, 40% of Americans pay ZERO Federal Income Tax (some even get net subsidies!), so right off the bat, almost half of Americans need to seriously shut their traps & do a little research before whining about fairness of U.S. Tax (etc) policy.  The half and mis-truths propagated by The Ignorati don’t stop there, though.  Not even close…

The top 25% of earners pay almost 87% of Federal Income Tax!  And that was in 2007, I doubt that number has gotten any smaller in subsequent years.  Put this another way, the lower 75% of earners only pay less than 14% of Federal Income Taxes even though they account for ~31% of income.  Those in the top 1%, by comparison, earn ~23% of income but pay over 40% of Federal Income Taxes, an increase in the tax burden on the top 1% of 57% over the past 20 years.

The top 0.1% accounts for half of the money earned by the top 1%, i.e. the VERY rich are and have been getting richer faster than the merely wealthy, who themselves are getting more wealthy, faster, than those in the top 10 and 25%’s.  Income’s at the top are increasing faster than those on lower income rungs of the income ladder(and this is just looking at the top 25%!)  This is not necessarily a surprise, though, considering the shifts in the U.S. Economy and labor force adjustments (or lack thereof).

Is it “fair” that the top 0.1% of earners pay over 20% of the taxes?  Is it fair that the 75% of filers making less than $32,095 (the lowest income in the top 25% in 2007) a year only pay 14% of taxes, yet are disproportionally the recipients of Government aid programs?  I think the answer to both is probably far closer to “no” rather than “yes.”

For example, wouldn’t it make more sense to decreases taxes on “the poor” so they would be able to keep more of their $ rather than giving it to the Government to waste on a grossly-inefficient bureaucracy with a questionable (if not downright poor) track-record of allocating capital efficiently?

Unless you think the majority of people in the lower 75% are worse at allocating their money than the Government, I think one would be hard-pressed to advocate against such a plan (and if you think that, then you are an even bigger cynical bastard than your humble yet cynical author, which would be truly sad).

Sure, $32,000/year doesn’t go very far in Manhattan or wealthy suburbs, but I just checked online, and you can get a 2,000+ sqft 3bed/2+bath pretty new construction home in Henderson, NV (right next to Las Vegas) for less than $200,000, which works out to a monthly payment of under $1,000, below the “spend less than 50% of your post-tax income on housing rule.”  Not a bad way to live without breaking the bank (assuming conservative other spending, no Partridge sized family, etc) even on such a low income, eh?  People in 2nd/3rd world countries would seriously KILL to live like that!

$30,000/year may seem like an absolute pittance, especially when compared to the incomes of those in the top 1% & higher, but unless you insist on living in Manhattan, Miami Beach, Beverly Hills, etc, you can still live better than 99.99% of the World’s population.  The Bottom half in China lives in a 500 sqft piece of crap shanty where they’re lucky if they have a 20-year old TV let alone a new 42″ flatscreen LCD you got on super-saver-sale from Wal-Mart on Black Friday.  Sure, you can’t live in a 5th Ave Penthouse or on the Beach in Malibu on $30,000/year, but please, unless you have 30 kids and spend all your money on crap you don’t need, you are hardly destitute (and if you do, that’s your own damned fault!).

Moving on…

Our tax code/policy is disgustingly over-complicated and wrought with all manner of perverse incentive.  Should those who make alot of money be expected to help the plight of those who make very little?  Sure, to a point, but as it stands now, I think the subsidies from the “rich” to the “poor” are both too many and too much.  Of course, we could similarly criticize the subsidies “the rich” (and businesses) are granted in the form of generous and plentiful tax deductions, but that’s a much longer discussion for another time.

Here’s what’s certain: Over the past 20 years (well, ’86-’07), GDP has increased 3.02%/year and has been positive for every year except once, in 1991, and even then, it was only -0.23%.  Meanwhile, average tax rates for the top 1%, 10%, and 25% have gone down on average 1.64%, 0.79%, and 0.67% respectively over this period.

Chew on that: When we cut taxes, we experienced significant economic growth, +87% GDP from 1986-2007. Many have argued that this # would be even higher if “The Rich” (usually arbitrarily defined as those who make more than $200,000 or $250,000) were taxed more heavily based on comparisons to prior periods when taxes and GDP growth were higher.  Most of these comparisons are false, in that they ignore fundamental shifts in reality.  Our economy, population, and relative standing in the world today  (to say nothing of any # of other variables) is NOTHING like it was generations ago, so any fair comparison would have to somehow adjust for this, and I’m not entirely sure that’s even possible (or how one would go about doing so if it were).

Are tax rates at their optimal point to maximize economic growth?  I’m not sure, nor am I’m sure anyone else knows what that optimal tax rates would be.  Unfortunately, even economists (who should know better than to let their politics inform their analysis) not to mention pundits and politicians are really just political ideologues sputtering-forth nonsense that’s seldom anywhere close to well-informed.

To answer some of the commentors questions/concerns, here’s some more info/analysis/explanation from the Tax Foundation, also via Alea

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12 Responses to “Who the REAL Taxpayers Are & Why Income Inequality Isn’t Nearly As Bad As Critics Claim”

  1. Dennis Hagan February 13, 2011 at 9:17 pm #

    If 36,000 is is such a good living why are the rich afraid to live on it?

    • Economic Freedom February 14, 2011 at 12:51 am #

      If 36,000 is is such a good living why are the rich afraid to live on it?

      Genius.

      The rich in China and India are not afraid to live on it. The rich in the United States have more options. More to the point: many of the rich in the U.S. started out in their early careers earning even less than $36,000. Instead of whining about it and holding out their hands demanding more from the state, they used their time and creativity to produce something that people wanted and became rich as a result.

      Most infuriating to the rest of the world about this historical fact, many of these American upstarts didn’t even have a college education or diploma “entitling” them to their later success.

      Those better options were the result of a longer national history that valued economic freedom, protected private property, maintained a stable monetary unit (based on a commodity such as gold), enforced contracts, lived according to the rule of law, etc.

      China and India are just learning the value of these things now — it’ll be awhile before they catch up to us despite their nominally high rates of GDP growth — whereas we in the U.S. are actually beginning to forget about them in favor of central planning by self-anointed elites.

      • Nick February 14, 2011 at 2:20 am #

        Cost of living. Check it out, it’s a very interesting phenomenon. And it happens to differ between The U.S., China and India. That is an actual fact.

        • The Analyst February 14, 2011 at 2:40 pm #

          Indeed, also Standard of Living. Middle 50% American (if they don’t stupidly have a dozen kids) can live in a nice, ok-sized house in most suburbs and have heat & a/c, 2 (if not more) TV’s and a computer.

          Last I checked that’s ALOT better-off than the middle 50% live in China/India/etc…

  2. frobn February 13, 2011 at 9:50 pm #

    You are setting up a straw man to knock down. If there were greater equality more people would be paying taxes and the poor* rick wouldn’t pay so much. Where you really miss out is that if most of the nation’s wealth is in the top 1% who gain it not through productive activity of actually producing something but through rents on poor Joe 6pack who doesn’t earn enough to pay any taxes. Here is the problem in graphic detail: http://www.oftwominds.com/photos10/wealth-pyramid2.gif.

    • The Analyst February 14, 2011 at 2:41 pm #

      You say this like its news or something. Do you think we should raise taxes on dividends/interest & capital gains? Would the increased revenues from the uber-wealthy who gain much of their income from these streams be worth the disincentive to invest? I doubt it.

  3. L Racine February 14, 2011 at 1:08 am #

    You are displaying symptoms of being a Psychopath.

    “Psychopaths gain satisfaction through antisocial behavior, and do not experience shame, guilt, or remorse for their actions.[12][13][14] Psychopaths lack a sense of guilt or remorse for any harm they may have caused others, instead rationalizing the behavior, blaming someone else, or denying it outright.[15] Psychopaths also lack empathy towards others in general, resulting in tactlessness, insensitivity, and contemptuousness.”

    • The Analyst February 14, 2011 at 2:42 pm #

      You’ve conveniently failed to make the connection as to what I said that implies psychopathic tendencies…

  4. br_add February 14, 2011 at 2:23 am #

    an overwhelming majority portion of the 40% of people who don’t pay income taxes do pay payroll taxes. additionally, a greater portion of their income goes to sales taxes.

    it seems like you are either making the elementary mistake of conflating income tax burdens with tax burdens or are deliberately ignoring that distinction as it suits you.

    • The Analyst February 14, 2011 at 2:43 pm #

      Was purely discussing Federal Income Taxes intentionally because they are the only tax that affects everyone (not everyone has a car & pays a gas tax, for example)…

      • br_add February 14, 2011 at 3:00 pm #

        but more people pay payroll taxes than income taxes.

        you are being incredibly disingenuous if you seek to exclude payroll taxes from discussion about US tax policy fairness.

        do you really think that because someone’s tax burdens are more based on payroll taxes than income taxes they are lesser stakeholders and should shut their mouths?

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